At Least for Investors, It was an Excellent Year
There was a lot we might like to forget about 2021. Devastating floods. January 6th. Inflation and supply shortages. The persistence of COVID. Overheated political rhetoric. But for investors at least, it was a great year.
Expectations were somewhat low coming into the new year. It seemed that markets had largely recovered from the pandemic inspired crash of early spring 2020 – yet COVID was still with us, vaccines were not yet available, the unemployment rate was still high, and the economy still seemed weak.
As vaccines rolled out and economic growth ramped up, companies once again started to post strong profits. Indeed, many firms (especially tech firms) had never seen profits decline at all – but now the recovery was able to spread throughout markets. Talk shifted from unemployment to employee shortages. Instead of worrying about not having enough paying customers, firms began struggling to figure out how to meet soaring demand.
As a result of strong economic conditions and continued low interest rates, stock prices continued to inflate through the year. It looks like the year will end with the S&P 500 up just short of 30%. That’s a historically very strong performance.
Our own investment strategies likewise had a strong year. Almost all of our investment models beat the benchmarks we set to measure performance. Importantly, they have performed well on both a risk-adjusted and on a nominal level. In other words, we generally saw our strategies outperforming their benchmarks for both risk AND return. Our financial planning clients have seen their plans strengthen and become more secure on the back of such strong investment performance.
Much of the success of the year was probably due to our management of the fixed income sleeve of our portfolios. As strong as stock markets were for the year, bond markets were weak. The Vanguard Total Bond Market Index fund was down 2% for the year. With interest rates so low, and inflation on the rise, we had diversified our sources of fixed income well beyond languishing and low yielding Treasury bonds. We had added positions in inflation adjusted bonds, preferred stocks, convertible stocks, utilities, and active strategies which were resistant to the malaise which gripped the broad bond market for much of the year. Ironically, taking a little more risk in fixed income resulted in lower volatility than the index-based benchmarks. With the Fed announcing their likely intention to increase rates in 2022, we continue to be a bit down on Treasuries and long-term bonds in general, and will continue to rely on these alternatives which served us well in 2021.
Gazing into the crystal ball for 2022, I will advise keeping expectations modest. The Fed will be tightening policy, inflation is still running very hot, and markets have run up such that many stocks (especially growth stocks and tech stocks) are looking very dear. At the same time, I am hopeful that we will finally see COVID 19 fade from view (not disappear, just be less of a factor in the economy and our financial lives).
Lastly, I would like to thank all my clients for their loyalty and trust throughout the year. I feel very fortunate to have such a wonderful group of people in my life. I wish you all a Happy and Prosperous New Year.